First things first, this is not a political post. If you’re looking to read about the merits of the right and left arguing over immigration policies and budget battles, I’m not your guy.
So, thankfully, President Trump agreed to sign a bill that funded the government for the next 3 weeks. I say thankfully because, regardless of how you feel about immigration or the budget, I think we can all agree that the Coast Guard, FBI agents, food inspectors, air traffic controllers and hundreds of thousands of other government workers who were either furloughed or working without pay need to get back on the positive side of the payroll. They do some pretty important jobs, and I’d rather my approach into Hartsfield Jackson be guided by someone who isn’t distracted by the thought of losing their home.
What I thought was most interesting about the shutdown as a whole was reading and watching the numerous stories about federal workers going to food banks or having to ask for a forbearance from the mortgage companies after only missing two or three paychecks. Now, I’m not trivializing this at all, but if these workers have to go to a food bank to feed their families after missing two paychecks then we need to have a very serious conversation about savings in this country.
When studying for the CFP® you memorize a ton of common practices about financial planning and how they apply to the average person. One of the most common practices is having liquid savings to support yourself and your family in the event that you are unable to work (or stop getting paid). Experts differ, but the general rule of thumb is that everyone needs to have at least 6 months of living expenses in savings at all time. At least. Self-employed individuals need at least 12 months of living expenses saved.
Now I get that it’s easy for me to get on my CFP® high horse and preach about the importance of savings but the fact of the matter is that we need to get serious about financial self-reliance, and liquid savings is the key to that freedom. According to a February 2017 study from the New York Fed, 1 in 3 Americans can’t come up with $2,000 to cover an unexpected bill or payment in 30 days. That’s over 110 million Americans who don’t have access to $2,000 without going in to debt or selling something. And to make matters worse, nearly the same percentage, almost 1 in 3 Americans, admit they are likely to have an unexpected expense or bill in the next year equal to or greater than $2,000. So these respondents are saying, “Yes, I know I’m going to have an unplanned expense. No, I don’t know how I’m going to pay for it. And no, I’m not doing anything about it.” Alarm bells are ringing.
That having been said, it’s mea culpa time. As a financial planner working with a lot of retirees, I’m constantly presented with clients and potential clients whose retirement income is based solely on social security and/or government pensions. Most supplement this income with private pensions or portfolio income, but social security and government pensions are usually the base of their income. I’m guilty of thinking that these salaries, pensions, social security checks and other government obligations are essentially guaranteed government payments. But the fact of the matter is that they aren’t, things could change, and we need to incorporate this reality into our financial planning practice.
So, if you’re still working and retirement is a goal for the near term, start saving a few extra dollars each month towards your rainy day fund. After a few years you may have saved enough to allow you to retire a month or two earlier than you were planning. If you’re in retirement and have positive cash flow, sock away those dollars you aren’t using to your level of comfort. Many of our clients like to have $10,000 in savings at all times, others it’s $50,000. The amount isn’t as important as just having something set aside. And finally, if you’re like me, and retirement is a long way off (or not even a goal in the traditional sense), start small. Try to save $1,000 in a rainy day fund. Once you hit $1,000, make it a goal to get to $2,000 and so on until you have a few months of income saved up. Trust me, you’ll sleep better at night.